Upside Target Capture Leaves Market at Minor Inflection Point

Friday's action was both expected, and a bit surprising, at the same time.  The most recent correction was anticipated to be a fourth wave, and as I've written many times previously, fourth waves are my arch-nemesis.  So with the first downside targets captured, and the upside targets now captured, we reach the inflection point and the next trade becomes a bit less obvious than the prior trades were.  I'm still marginally inclined to favor the idea of another leg down, but this isn't a cut and dried call as it sometimes is.

Let's start with the S&P500 (SPX) 30-minute chart.  Given that the price action has performed almost exactly as drawn on December 4, one might ask why I have any doubts at this point -- to which I'd answer that first off, it's a bull market, which means surprises are almost always to the upside.  Second, it's simply the nature of the game.  A few days ago, people were fearful and bearish, because it's in our natures to think and project in a linear fashion; for the same reason, most people are bullish as we open this week.

As Robert Arnott once said so wisely, "In investing, what is comfortable is rarely profitable."

    
The 3-minute SPX chart notes some additional signals:

I'd like to revisit the SPX daily chart briefly to help provide a bit more perspective.  There's been no material change since November 11, and I'm still anxious to see if we hit the projections of that same date, and if that indeed marks the peak of red v of red (3).

If all preferred wave counts play out across all wave degrees (to be fair, that's basically asking for perfection from my work, which is something I'm rarely capable of), then we'd see another wave down over the near term, followed by a recovery and final rally into the wave v target zone, followed by an abrupt peak and decline.  Purely from a market psychology standpoint, a move like that would really create the feeling of a whipsaw market, along with mass confusion.

At the moment, though, the immediate question is whether wave (4) has completed or not.  The invalidation point for wave (4) remains 1813.55, so near-term bears don't have too much real estate in which to make a stand.  If wave (4) proves to have completed, then we'll turn our attention to the remaining 1825-1840 target zone of the next higher wave degree.  Trade safe.

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Downside Targets Captured: Where Next?

Last update anticipated a decline to 1779-1785, and noted that should be a good buying opportunity for at least a near-term bounce.  That target was captured, and the projections played out quite well.  Today's update has the potential to get a bit confusing, since I've drawn projections across several time frames, so I'm going to summarize briefly before continuing:

1.  Near-term, I expect higher prices.
2.  I presently expect that bounce will be sold to new swing lows, though the alternate count allows the possibility that all of wave (4) is complete.
3.  The larger trend is still up.

Let's start with the 30-minute S&P 500 (SPX) chart to get our bearings. Ideally, I'd still like to see a trip into the 1825-1840 target zone -- however, I'd prefer to see new lows before that happens.  That said, the market has already captured the minimum downside targets for the expected fourth wave.

Near-term, I expect a bounce from the cash market.
 

Longer-term, I've again chosen the Wilshire 5000 (WLSH) for discussion purposes.  It is worth noting that the position of black "bear v" hasn't moved since it was annotated -- which was weeks before the recent turn occurred.  Since reality has now performed in line with that potential, we must at least continue to consider it as a viable possibility.  We're way ahead of the game here (and this market hasn't even broken the upper blue trend line yet, so there's nothing terribly bearish in the action so far), but I should at least mention that in the event that the recent peak did mark the end of v, then this correction will last months.  That's a warning, which we'll update as appropriate -- however, given what's in the charts so far, we have to continue to give the benefit of the doubt to the established trend, which is up.

 
In conclusion, the long-term trend remains up, but the recent decline probably counts a bit better as an impulse wave, which suggests we may see new lows after the near-term rally completes.  Alternately, trade above 1813.55 would clear SPX for a trip directly into the next target zone.  Trade safe.

SPX and INDU Updates: Dow Triggers a Warning Signal

"There is no training, classroom or otherwise, that can prepare for trading the last third of a move, whether it's the end of a bull market or the end of a bear market." - Paul Tudor Jones

In Monday's update, I noted that November's 1809-1816 target had been captured, and warned that a larger correction appeared likely.  Later that same day, the S&P 500 (SPX) even presented longs with a second opportunity to exit within the target zone before dropping below 1800.  The market has continued to follow the expectations of last month's preferred wave count, and today I have some added signals and potential targets.  I'll let the chart annotations do most of the talking today, so we'll start with the SPX 3-minute chart and build from there:

Now that there's more info to draw from than there was during the weekend (Monday's update), I can provide a bit more perspective on the SPX 30-minute chart.  Note the potential head and shoulders top under construction.  The alternate count has to be considered for the moment, since this is not yet a clearly-impulsive decline -- a new low would give it a much more impulsive appearance.

The Dow Jones Industrial Average (INDU) notes an interesting warning pattern that has formed in RSI and MACD:

In conclusion, if this decline is indeed part of the anticipated higher degree fourth wave correction, then it should be at least two legs in depth.  A new low from the current leg would go a long way toward confirming that outlook.  Trade safe.

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SPX Captures November Targets; What Next?

"What sets successful traders apart?  Most people think that winning in the markets has something to do with finding the secret formula.  The truth is that any common denominator among the traders I interviewed has more to do with attitude than approach."  -- Jack Schwager

On Friday, the S&P 500 (SPX) captured the next target zone, and promptly turned where it "should" for the preferred Elliott Wave count.  We're now entering waters that, while not exactly dangerous yet, certainly call for added caution.  Part of Elliott Wave Theory revolves around counting the number of waves in the correct way, and then anticipating (based on that count) where market will head next.  For the past few weeks, the market has been unraveling fourth and fifth waves (the final waves in a series), and we've now reached a point where it becomes a game of inches. 

The best way I can explain this:  when you count the early portion of a wave (the first and second waves), there's always at least one or two that are a bit vague.  Let's draw an example, and say that you work your count and determine that there are probably 7 first and second waves, which means at the end, you'll anticipate 7 fourth and fifth waves.  But one of those waves is vague -- so you're not 100% certain there are 7.  You can see the potential that perhaps there are only 6 -- this means that you can have pretty high confidence in 6 fourth and fifth waves coming at the end of the series... but that final wave to make it 7 becomes a lower probability trade.

This is basically where we are now.  I had high confidence in the last two fifth wave rallies; however, my confidence is not as high for another one.  Given the charts as of this moment, I'm still leaning toward it, but be aware that it's a higher-risk proposition and act accordingly.  Also be aware that the wave count suggests we may be nearing a higher-degree fourth wave correction -- this means that the coming correction is likely to be deeper and longer-lasting than the previous two.

Let's start with the 30-minute SPX chart.  Note that the location of gray (4) is not intended as a target on this chart -- it's far too early to calculate a high percentage target for that wave, or even to confirm that gray (4) has begun (since the market has yet to form a five-wave impulsive decline for confirmation and target purposes).

The SPX SPDR ETF (SPY) also has enough waves to count as complete, and suggests odds are increasing that a correction is looming.  I'll track and update the odds and signals for the noted potential fifth wave extension as it unfolds.

The Dow Jones Transportation Average (TRAN) is now bumping into the upper boundary of its long-term trend channel.  In itself, this doesn't guarantee a correction -- but it certainly calls for a healthy dose of caution.

In conclusion, Friday's target capture and reversal came right where the waves suggested it would, but as of yet, we do not have a five wave decline to confirm a trend change.  Based on the rest of the wave count, though, in a perfect world, I'd like to see a deeper correction unfold in the near future.  If the higher-degree wave count is also correct, ultimately there will be another buying opportunity down the road, for a trip into the next target zone.  Trade safe.

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Is it Time for Caution Yet?

Sometimes it's hard (for me, anyway) to follow my own updates because I typically write 3-4 per week and, due to the nature of the space-time continuum and my finite existence within it, they need to alternate randomly between somewhat inspired and somewhat mundane.  Yesterday's update was based on decades of hands-on research (i.e.- my own life experiences), but today's update is going to be a bit more on the mundane side (if you missed yesterday's article, it can be found here: 3 Common Psychological Mistakes Traders Make, and How to Overcome Them)

On Monday, the S&P 500 (SPX) rallied to within one point of my standing upside target and stalled.  The question everyone seems to be asking now is "was that it?"  Today, we're going to take a somewhat ambitious look at multiple degrees of trend, from the very near-term to the very long-term.  I can't promise to get all of these right.  I always think of long-term projections in terms of "leverage" -- the market's a dynamic environment, things can change dramatically from week to week, so a moderate change this week or next can leverage itself into a larger change over time.

It's interesting that bears seem to be capitulating with greater frequency lately. I find the mass sentiment shift which has been occurring recently to be of interest, since such things are sometimes precursors to a big shakeup in the market.

Let's start with the near-term chart and build from there.  The first chart is the SPX 3-minute chart.  Right now, the market has formed three waves down, which is a corrective structure.  This would be an excellent place for the correction to complete -- however, if it does go on to become a five-wave decline (gray iv and v), then we'll have to anticipate that the near-term trend has shifted and expect it to be followed by a bounce and another leg down.

As noted above, the near-term chart leads me to believe it's probable there will still be a move up into the "official" 11/14 target zone.  The 30 minute chart is starting to show some warning signs that the rally may be tiring, though more action is needed to turn those early warning signs into more significant signals.  Maybe the best way I can state it is as follows: the market is in the midst of a wave pattern which dictates that alternate counts with larger top potential need to at least be considered and watched.  If one of the alternate counts is to become reality, though, we should start to see five-wave impulsive moves to the downside as early indications, which would then suggest we adjust projections accordingly.

As you can see on the chart below, my preferred count is unchanged, and still rather aggressively attempting to anticipate several more bull/bear shifts (the last few portions of the projection have already come to pass).  As I stated earlier, I can't promise I'll get all of these right this far ahead of time, and they may need to be adjusted in real-time.  It is possible wave (3) completed at 1808, but I feel the structure would count better if it made another thrust up into the target zone.

The daily chart is unchanged from November 15, and in a perfect world, I would still like to see the market stair-step its way up into the 1825-1840 zone.

In conclusion, at this exact moment, I'm still inclined to favor higher prices.  However, I am also presently of the opinion that the pattern suggests we're nearing a more significant corrective phase ("nearing" in terms of price, not necessarily in terms of time).  The last few moves were fairly straightforward to me, but I think things are going to get a bit more interesting relatively soon, and am prepared to adjust and update the projections as needed.  Trade safe.

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Three Common Psychological Mistakes Traders Make, and How to Overcome Them

The only technical news fit to print since Friday's update is the S&P 500's (SPX) new all-time-highs, which have officially validated my preferred Elliott Wave count of the past couple weeks.  There's been no material change in the market outlook for a while, and there are only so many ways I can say "the projections still look good" -- so today we're going to explore three common psychological mistakes which can derail traders (or anyone, frankly), and some strategies to overcome those mistakes.

Emotions in general are the enemy of traders, but certain emotions can be particularly damaging because they start us down a long path which ultimately ends in self-defeat.  Much trading advice has been written about greed and fear and similar emotions -- so I'm going to cover a more subtle topic: the emotion known (rather generally) as "discouragement."

Discouragement rarely hits us all at once, but tends to build over time in response to an ongoing series of setbacks and/or failures.  As negative events pile one on top of another, we may gradually become discouraged with our own efforts.  This feels like a "natural" response to the situation, so we often fail to recognize the immediate danger we're putting ourselves in:  Discouragement feeds on itself and can easily become a self-fulfilling prophecy. Negative events beget discouragement; discouragement begets reduced effort; reduced effort invites failure -- and failure begets even more discouragement... rinse and repeat.

If not halted quickly, we can gradually spiral downwards into a dark trap of our own making. 

In trading, this series of negative events often takes the form of a string of losing trades.  With no big winners to break the cycle, we feel increasingly frustrated and ineffective as we watch our accounts dwindle.  During these cycles, sometimes even the winning trades can make things worse for us emotionally.  If you've traded even moderately, you will know exactly what I'm talking about when I say that during these "losing trade cycles," it seems we always manage to close the winners for negligible profits only minutes before the market explodes in the direction we were hoping all along.  I believe this is unlikely to be coincidental, and may actually be a result of our own mindset -- part of the "self-fulfilling prophecy" of discouragement.

I imagine virtually everyone has encountered this type of setback cycle at least once (probably more than once) in their lives and trading careers.

Ultimately, discouragement is an internal response to external events.  And that's good news -- because while we cannot control the market or life itself, we can control our reactions to both. In fact, sometimes our only weapon against forces larger than ourselves is the freedom to choose our own reactions.  Granted, sometimes choosing positive reactions to negative events is easier said than done, especially when life seems to be kicking us while we're down.  Life is difficult.

But it's critical to keep these negative emotions in check, because even moderate discouragement can and will create a self-fulfilling pattern of failure if not halted immediately.  

So let's discuss some of the psychological pitfalls that lead to (and at the same time embody) discouragement -- and how we can overcome them:

Pitfall #1:  Being overly harsh with ourselves when we're already beat-up:

One of the worst things we can do to ourselves is to become overly harsh and endlessly self-critical at moments when our self-esteem is already suffering.  Sometimes we speak to ourselves in ways we would never even consider speaking to another person, and this negative self-talk can be extremely damaging to us (just as it would be if we were speaking to someone else!).  We sometimes justify this talk by telling ourselves it's a form of "tough love," and that we're using this harshness as motivation to improve -- but harsh self-talk doesn't motivate us when we're already wounded; all it does is discourage us even more.

If you just made a losing trade, beating yourself up afterwards simply doesn't help.

When our self-esteem is injured, the best way to position ourselves for future success is to nurture that esteem back to good health by focusing on the positive things we know to be true about ourselves -- not to crush ourselves even further with negative self-talk.   (Not surprisingly, the same is true when we're speaking to others whose self-esteem is suffering.)

Pitfall #2:  "You can't fire me -- I quit!" syndrome:

Another common mistake is to quit an effort before the battle is truly lost.  This is a self-defense mechanism -- it's a way to give ourselves the illusion of control by voluntarily giving up before we are (we assume) involuntarily defeated.  This one may be the toughest of the three pitfalls, because there are times it is absolutely correct to give up -- so we have to understand both ourselves and the situation to recognize when surrender is the correct course, and when it's an emotional cop-out.  Many times, we're quitting not because the situation is actually lost, but because we're discouraged and tired of the struggle. 

The average millionaire has gone bankrupt more than 3 times in his or her lifetime.  What separates those folks from the rest of the pack isn't luck, but the internal perseverance to pick themselves up and try again even after repeated failure.

The second reason this pitfall is challenging is because we frequently offer compelling excuses as to why quitting is the right move, and eventually convince ourselves that we're "just being realistic."  We tell ourselves that, gosh-darn-it, we tried our best -- but in the end, we just couldn't cut the mustard and that's okay, it just wasn't meant to be, blahblahblah.  There is a short-lived sense of relief that comes with giving up, as the pressure is suddenly lifted.  But it goes without saying that in order to reach one's full potential and discover what one is truly capable of, then one has no choice but to push oneself beyond the limits already known, comfortable, and familiar. 


If your goal is to go from being a losing trader to a profitable trader, then the only way to achieve that is to apply techniques you are not currently using.  Those techniques will initially seem foreign, unnatural, and uncomfortable.

People are inherently goal-driven; without goals to strive toward, our spirits gradually begin to atrophy just as an unused muscle would.  Pushing our own limitations makes us stronger.

(continued, next page)  

SPX Still on Track and the New Key Levels

It's always tempting to become complacent after a rally like yesterday's.  The preferred bullish wave count appears to be unfolding as anticipated, which makes it easy to forget that there are other patterns still viable.

I still favor the bulls, but I'm going to spend most of the article talking about where that projection would be called into question.

The main option still available to bears is for a repeat of the fractal we saw earlier this month: an expanded flat.  The difference is that last time around, I felt pretty confident an expanded flat was unfolding and we'd reverse to new low -- whereas now, I would not put the expanded flat in first place as the preferred count.  But I can't rule it out either -- there's just enough ambiguity at the moment to suggest bulls should stay on their toes.  The 30-minute S&P 500 (SPX) chart notes the potential for the bear pattern, and the newly-drawn green trend line should serve as fair warning.
 

 
The short-term SPX chart doesn't offer a high-probability near-term count, at least not to my eye.  I can see potential for a partial retrace of the rally, but I can also see potential for it to simply run straight up to new highs.  I try to offer near-term projections whenever I can, but when the two minute charts look like a coin-flip to me, I don't want to give a false impression -- so I've noted a few levels, and we'll simply have to wait for the market to tip its hand.  Note yesterday's successful back tests of both down-sloping trend lines suggests that buyers were anxious to jump on board.
 

Two-minute chart squiggles aside, the long-term ratio chart of equities and bonds seems to support the preferred count at higher degree, and does suggest the idea that the market is indeed wrapping up fourth and fifth waves.  We can see that when RSI has reached similar levels in the past, it has often led to a larger pause or retrace in equities.

If the preferred count in equities is correct across all degrees of trend, then we're close, but not quite there yet.

In conclusion, while I spent most of today's article talking about the bear argument, I would continue to give the odds to bulls for new highs.  In the event bears can reclaim the noted levels and trend line, then we'd need to shift odds accordingly.  Trade safe.

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